Tax talk makes me nervous, but it could be worse, 28 other OECD countries are more heavily taxed than Australia.

There has been a lot of recent chatter from Australian politicians about different ways to top up the government coffers. Some of the suggestions so far are chasing the big digital companies (NetFlix, Google, Apple), broadening the GST tax base, increasing the GST rate and fiddling with the ways that residential real estate is taxed.

The underlying issue is that the cost of providing the public services that we have grown accustomed to is higher than the revenue base available to support it. One obvious solution is to reduce the cost of government. However as I have shown in a couple of previous posts, Australia has a relative low number of bureaucrats per capita both federally and in the state governments. Hence I suspect that the tax talk is softening us up for some inevitable ‘tax reform’.

The hardest thing to understand in the world is the income tax. Albert Einstein

I don’t profess to be a tax expert and would not be bold enough to publish my ill-conceived tax advice. I am however curious to put some perspective on the tax discussions by knowing how Australia compares with other countries. I wonder if we pay a lot of tax relative to other countries and how our tax base is derived compared to theirs?

Tax basics

Taxation is broadly broken down to:

Good and Services (GST) or Value Add Tax (VAT) as it’s called in most countries,

Personal Income Tax : in most countries this is a sliding scale which increases as you earn more.

Corporate or Company Tax : In Australia this is 30% of company profit, but through novel tax minimization schemes multinationals seem to do much better.

Payroll Tax: A surcharge that your employer pays for the privilege of having employees – kind of like another form of company tax, but rather than a tax on profit it is a tax based on the salary you pay your employees.

Property Tax: Taxes like stamp duty or a flat tax based on the value of the property assets that you hold.

Social Security: These are taxes specifically earmarked for social security such as retirement and disability benefits. Australia doesn’t have a specific Social Security Tax, but these expenses come out of consolidated revenue and are effectively wrapped up in the other forms of tax.

A myriad of smaller, usually local taxes which are not considered here.

The OECD has been doing a sterling job of collating and publishing summary records for taxation across its member countries. In using the OECD data , 2014 was missing for about 1/3 of nations, so I used the 2013 data which was almost complete (missing Chile and Mexico). Therefore the following analysis is based on 32 of the 34 OECD countries (i.e. excluding Chile and Mexico).

How much tax do Australians pay?

The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of squawking. Jean Baptiste Colbert.

Firstly just consider the tax paid per capita (in US Dollars) across the OECD nations (Figure 1). This is simply the total tax burden across all forms of tax (points 1-6 above) divided by the population. That is not just your personal income tax, but the total tax collected by government divided by the total population. Australia comes in at number 11 (of 32) with an average of just over $18,000 USD per person per year contributed to the tax base. This is about 20% more than the OECD average of nearly $15,000 USD per person. That is outrageous! 20% more tax than my OECD comrades. I won’t stand for it. In fact I think I’ll move to Hungary where the tax per capita is only around $5,000 USD per person.

Figure 1: 2013 Tax per capita ($USD)

Taxation relative to GDP

Figure 1 is a schoolboy level statistical lie, but I include it as we are sure to be shown similar graphics in the evening news. Figure 1 is only meaningful if $1US had the same buying power everywhere. Australians might pay more tax than the Hungarians (nearly $13,000USD more per year), but your dollar goes a lot further in Hungary (i.e. Hungarians earn a whole lot less than Australians). To get a little perspective and allow a proper comparison between countries I have used the tax paid scaled to the country’s Gross Domestic Product (GDP) (Figure 2).

Based on the total tax base as a proportion of GDP, Australia is way down the list (29th) as one of the least taxed countries in the OECD with the total tax base being about 27.5% of GDP. The United States is noticeable lower (25.4%) which might account for criticism of the US health care and education systems. Similarly the world renowned universal health care of Denmark can be partly explained by a taxation base of nearly half their GDP.

In this world nothing can be said to be certain, except death and taxes. Benjamin Franklin.

The different bar segments in Figure 2 show the contribution of each taxation component to the overall tax base. For example, the bottom blue section shows the contribution to the tax base from GST. For Australia the GST take is 7.8% of GDP, compare this to Hungary with a GST rate of up to 27% on some goods which ends up accounting for a GST contribution of nearly 17% of GDP.

The Social Security component (light green) is something that we are not familiar with in Australia as it really comes out of the collective consolidated revenue rather than a targeted tax. But for some countries the Social Security aspect is really high (e.g. France – 16.7% of GDP). One could argue that compulsory superannuation in Australia is effectively a social security tax. Although the tax experts would argue against this as your superannuation does not go toward government coffers and is held in private funds. So rather than a tax it is more of a big brother compulsory savings account that the government cannot spend on your behalf building freeways.

Figure 2: Tax paid as a percentage of GDP for OECD nations for 2013

Relative tax components

So we know that Aussies don’t pay as much tax as most other OECD members. If we now stretch out each part of the columns in Figure 2 to 100%, we can see the relative importance of each tax component (Figure 3).

We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. Winston Churchill.

For Australia, GST accounts for 28.4% of the tax revenue, (32.7% average across the OECD) so you can understand the attractiveness of broadening this base or increasing the rate. With a small percentage change you get a huge increase in the tax base. You can also anticipate the pollie-speak ‘we should increase GST because Australia’s GST contribution is below the OECD average’.

You can also see that the most painful tax (personal income tax) makes up 39.2 of the total tax collected in Australia, compared to an average of 24.8% across all OECD nations. Australia has the second highest personal income tax (after Denmark), although arguably this includes the social security elements that other countries account separately. Either way that’s a pretty high proportion of tax from personal income tax. Even so I cannot imagine a politician saying ‘we need to lower the personal income tax to bring it in-line with the OECD average’.
Tax garnered from companies in Australia accounts for nearly 18% of the tax base. You may be happy for large faceless organisations to pay more tax. However, the OECD average is only 8.5%, and many countries are around 5%. So despite the recent criticism of some clever accounting by international internet based businesses, Australia does pretty well in terms of getting business to contribute to it’s tax base even if it is mostly from small business.

Figure 3: Relative proportion of Tax base for OECD nations

Source :OECD
Even though Australians are amongst the lowest taxed people in the OECD it still hurts to pay taxes. So next time you are filling out your tax return and feeling screwed, just remember that people in 28 other OECD countries are getting more screwed than you.

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